Earnings Call Transcript - ALIT Q4 2025

Operator, Operator

Good morning, and welcome to Alight's Fourth Quarter and Full Year 2025 Earnings Conference Call. There is a presentation accompanying today's discussion available on Alight Investor Relations website. I will now read the safe harbor statement. Today's discussion includes forward-looking statements as defined by federal securities laws. These statements represent management's current views and expectations and are subject to risks and uncertainties that could lead to actual results differing significantly. The factors that may cause these differences are detailed in today's earnings release and in Alight's filings with the Securities and Exchange Commission, including the Risk Factors section of our most recent annual report on Form 10-K. The company does not promise to update any forward-looking statements, except as required by law. Additionally, during today's call, the company may discuss certain non-GAAP financial measures. A reconciliation of these measures to the most comparable GAAP measures can be found in the earnings release available on the company's website. I will now turn the call over to Rohit Verma, Chief Executive Officer of Alight. Please go ahead.

Rohit Verma, CEO

Good morning, and welcome to Alight's Fourth Quarter 2025 Earnings Call. Joining me today is Gregory Giometti, our Interim Chief Financial Officer. This is my first earnings call as Alight's CEO, and I'm pleased to have this opportunity to speak with you so early in my tenure. I joined Alight at the start of the year and over the past 30 working days, have focused on meeting with our colleagues and clients and diving into our operations. I'm extremely pleased with the very warm welcome from our colleagues as well as the support I have received from the Board and the connections I've already created with our clients. I'd like to take this moment to share why I chose to join Alight. And over the last 6 weeks have only strengthened my conviction in the opportunity ahead of our business. Alight has strong underlying DNA. Our scale, client relationships, domain expertise and operational footprint provide a significant competitive advantage and leadership position in the marketplace. We serve a wide spectrum of employers, including the majority of the Fortune 100. We offer essential and unmatched benefit solutions via a platform that offers extensive flexibility to accommodate a wide range of client needs from straightforward to the most complex plans in the market. Our midsized clients benefit from simpler platforms, and we also provide specialty solutions such as leave administration to meet our clients where they are. Our vast data lake creates a proprietary advantage that enables predictive end-to-end orchestration when implementing AI, which will allow us to transform employee experiences into proactive life journeys, driving better outcomes for employers, employees and their families. And our top-tier partner network allows us to provide participants a holistic experience, putting us at the center of the benefits ecosystem. More than 30 million people and dependents rely on us in their most important moments when someone is sick and needs access to their insurance, when someone is looking to start a family and wants to better understand their health and wealth benefits or when someone is disabled and needs to understand their leave options. At the end of the day, it is about delivering a frictionless experience with empathy and care that delivers a compelling outcome. The ability to provide benefits is a fundamental offering for most organizations, yet regulatory requirements and rising costs make it challenging for organizations to do this on their own. Most employers do not have the in-house expertise, scale or technology required to manage the complexity effectively, making the outsourced administration of health, wealth and leaves an essential purchase. We believe our products and solutions are needed regardless of external economic cycles. And when we execute well, we create sticky relationships with predictable revenue. Our expertise across the benefits administration landscape and our ability to provide effective plan solutions to a wide variety of employee groups is a competitive advantage. The strength of our solutions and our organizational expertise lead us to believe that the market opportunity in front of us is substantial. Not only do we see opportunity in the broader market, we believe there is meaningful white space within our existing client base. With deep penetration among large and midsized employers, we have a solid foundation from which to expand our relationships and grow market share over time. That said, we have work to do. In 2025, we did not meet our internal financial targets and new bookings and renewals did not meet our expectations, leading us to miss our forecast to the market. During my first 6 weeks at the company, I've connected with more than 35 clients, and it is clear to me that clients want to continue working with us as we play a critical role in helping them manage increasingly complex health, wealth and leaves programs. They're also clear in their requests that we bring simplicity to their participants and management by providing cutting-edge solutions. Our clients expect flawless service delivery and continued innovation in products that create better outcomes. The attractiveness of our market, our coveted position and the clarity of the asks from our clients enable us to be clear-eyed about our priorities going forward. As a result, our immediate focus is driving service and operational excellence across our unmatched portfolio of benefit solutions, innovating products enabled by AI to create a cutting-edge user experience, real value and actionable insights for clients and participants, while building relationships that result in enduring trusted partnerships with clients, participants and partners. These priorities are all things within our control, which give me great confidence in our ability to improve as does some of our recent progress. For example, during the fourth quarter, we piloted conversational AI with 2 of our largest clients during the recent annual enrollment cycle. We are very encouraged by the results where we saw a significant reduction in channel jumping, which is when a user moves from digital enrollment to calling the call center. This high reduction rate is indicative of the improved efficiency and participant efficacy experienced with the conversational AI product. Before I turn the call over to Greg, I want to provide some details on our 2025 financial performance. We generated $2.3 billion in revenue with adjusted EBITDA of $561 million and an adjusted EBITDA margin of approximately 25%. With that said, I would reiterate that we believe there is significant opportunity to improve our performance moving forward. Our adjusted EBITDA in the fourth quarter was impacted by an increase in compensation expense driven by our commitment to invest in the business with a focus on promoting service quality, strengthening relationships and positioning the business for growth. Importantly, the business generated $250 million of free cash flow in 2025, which enabled us to maintain a strong liquidity position and positions us well as we head into 2026. With that, I'll turn the call over to Greg to walk through the financials in more detail.

Gregory Giometti, Interim CFO

Thanks, Rohit, and good morning, everyone. I'll walk you through our fourth quarter and full year 2025 results. Turning to our fourth quarter results. We continue to think about revenue mix across 2 categories: recurring renewable business and nonrecurring project-based work. Revenue for the fourth quarter was $653 million. Recurring revenue of $607 million was down 1.6% compared with the prior year period. Project revenue of $46 million was down 27%. Fourth quarter adjusted gross profit was $272 million, down 9.3% from the prior year period, reflecting an adjusted gross profit margin decline of 240 basis points. Adjusted EBITDA for the fourth quarter was $178 million as compared to $217 million in the prior year period. Fourth quarter 2025 adjusted EBITDA margin was 27.3% compared to 31.9% in the prior year period. Adjusted EBITDA during the fourth quarter of 2025 was adversely impacted by increased compensation expense, which we believe is critical to executing on our priorities. This impacted adjusted EBITDA by approximately $45 million. Excluding this, adjusted EBITDA would have been within our previously communicated guidance range. Adjusted net income in the fourth quarter was $96 million with adjusted EPS of $0.18 compared to $127 million of adjusted net income and adjusted EPS of $0.24 in the fourth quarter of 2024. Looking at the full year, total revenue was approximately $2.3 billion. Recurring revenue of approximately $2.1 billion was down 2.2% compared to the prior year period. Project revenue of $154 million was down 22%. Adjusted gross profit for the full year was $883 million compared to adjusted gross profit of $942 million in 2024. Full year adjusted gross profit margin decreased 100 basis points compared to 2024. Full year adjusted EBITDA was $561 million with adjusted EBITDA margin of 24.8% compared to adjusted EBITDA of $594 million with adjusted EBITDA margin of 25.2% in 2024. Adjusted net income for the full year was $266 million with adjusted EPS of $0.50 compared to $313 million of adjusted net income and adjusted EPS of $0.57 in 2024. In the fourth quarter of 2025, we recognized a noncash goodwill impairment charge of $803 million. We have remaining goodwill of $83 million on the balance sheet. Turning to capital and liquidity. We ended the year with $273 million in cash and equivalents in addition to a $330 million fully undrawn revolving credit facility and free cash flow for the year was $250 million, providing us with significant financial flexibility. With this, we are well positioned to fund our 2026 TRA payment, which is estimated to be $156 million. Importantly, as a result of tax reform related to the one big beautiful bill, we do not expect to make a significant TRA payment in 2027 or 2028, which meaningfully increases our flexibility around capital allocation. After reviewing our capital allocation priorities with the Board, the company has decided to reallocate capital in favor of higher return priorities, including investing in the long-term growth of the business, deleveraging and opportunistic share repurchases, which will replace future dividend payments.

Rohit Verma, CEO

With that, I'll turn the call back to Greg. Thanks, Greg. Let me build on that and provide some more detail on our capital allocation. With the support of the Board, we're thinking more holistically about capital allocation. Our goal is to create the best return for our cash deployed. The current structure locks us into dividend and takes away the flexibility to be more thoughtful on our capital allocation. With our strong cash flow and anticipated TRA deferral, we believe it makes sense to take this opportunity to return value to our shareholders through a combination of reducing the company's leverage and through the opportunistic repurchase of stock rather than continuing our quarterly dividend at this time. Our existing repurchase plan has a remaining buyback authorization of $216 million, giving us the ability to reengage our repurchase activities in the near term. At the current levels, we believe our stock is undervalued and that repurposing our capital allocation towards debt reduction and share repurchases is a more efficient and effective use of capital. As I shared with you earlier, we are disappointed with our 2025 results. While we are focused on embracing a disciplined execution plan, we do believe the weakness experienced in 2025 will spill into 2026, and our performance improvement hinges on the successful execution of our priorities over the next 9 to 12 months. We will keep you up to date on our progress. We view 2026 as a launching pad for our performance inflection as we focus on positioning Alight for sustainable long-term growth. We enter 2026 with strong liquidity and a solid cash position and a portfolio of strong client relationships. We are being methodical in our approach with a focus on a small set of key operating priorities and expect to deploy more than $100 million of capital to strengthen the foundations of the business and position Alight for long-term growth. First, we are focused on delivering service and operational excellence. That includes investing in our client-facing teams by adding sales and account management professionals to increase coverage across our client base. Second, we are advancing product innovation by creating a world-class user experience using AI as an enabler to simplify user interactions and improve insight for both clients and participants. Alight's deep and highly differentiated data lake is enriched by decades of domain expertise and scale and they are uniquely positioned to deliver more personalized, predictive and outcome-driven experiences that set us apart in the market. Likewise, we plan to more broadly deploy AI internally to assist with routine tasks so that our professionals can focus on providing the thoughtful expertise our clients and their employees expect. Driving innovation in our solutions from the top down is another critical priority for us. To that effect, we recently announced that Karen Frost will lead our Health and Navigation Solution and Kevin Curry will lead our Leaves Solution. We intend to announce a leader for our Wealth Solution shortly. We believe these additions will effectively align our solution strategy and heighten our ability to deliver a high-quality benefits experience for our clients. Third, we are focused on strengthening our existing relationships while adding to our client base. We have proven our ability to provide operating efficiency, consistency, reliability and execution across the complex benefits landscape, and we will leverage this success to expand our relationships with current and new clients and establish partner collaborations that allow us to serve at the front door to a holistic benefit experience. I am confident that we are at the forefront of implementing the right strategy to return the business to long-term growth, but this will take some time. Given that we missed guidance targets several times in 2025, I don't think it's prudent for me to provide full year guidance when I'm just 30 working days into my role. What I can say is that we expect first quarter 2026 revenue to be down by high single-digit percentage range. Likewise, we anticipate that our planned investments in sales, account management and user experience will create short-term adjusted EBITDA margin pressure, resulting in a decline of 500 to 750 basis points as compared to last year's first quarter. We view these investments as critical to executing on our stated priorities and meeting the expectations of our stakeholders. While our business has faced challenges, the attractive market dynamics, our strong leadership position and clear direction from our clients gives us a very achievable roadmap for driving margin expansion and growth in the midterm. Our strong cash flow provides us the financial flexibility to invest $100 million to drive product innovation, partner expansion and an enhanced experience for our clients and their employees. Our recent service and innovation successes leave us confident that we can further expand our already enviable market position. I'm energized by what I've seen so far and certain that we're putting the right strategy in place. I believe we can put the business back on a path to sustained profitable growth with the expertise and focus of our teams. With that, let me open the call for questions.

Operator, Operator

The first question is from Peter Christiansen from Citi.

Peter Christiansen, Analyst

The messaging around scale, the partner ecosystem, and mission-critical platform capability has remained consistent with previous execution teams. However, there has been a significant gap between this sentiment and the company's asset value and core financial performance. We have seen regular misses in client retention, pipeline conversion, and overall growth stability. I understand you've only been in your role for 30 days, but I have three questions. First, what do you believe have been some drivers of the financial underperformance in recent periods? Second, given your previous experience as CEO at Crawford, what skills do you bring that could help turn the company around? Lastly, I recognize this is another transition year for the company. How should we approach measuring any milestones over the next 12 months? Thank you.

Rohit Verma, CEO

Thank you, Peter. Great set of questions. So let me start from the top, right? What do I think are the drivers for the financial underperformance? First and foremost, I had a hypothesis when I was coming into the organization. And that hypothesis was, as you stated, we're in a great industry. We've been here for a long time. Our brand is well recognized. We've got an enviable client base. And we have a service that if we execute well, it should be sticky. 30 days in, I have only strengthened that conviction, which is that those things are absolutely correct. Obviously, while coming in, I also knew that financially, we had not performed to the expectations of the organization as well as that of the Street and that also I have seen. I would say the biggest challenge for us has been on driving operational excellence, which to me is an execution piece. So this is not a change in the strategic direction of the company. This is a change in the execution of the company. So the biggest piece that we need to tighten is around execution. It's execution around operational excellence, it's execution around client management and relationship management, and it's execution around technology and continuing to innovate our products and services. So that, to me, are the 3 biggest pieces that we have to push on. That leads me into my experience as the CEO at Crawford. When I joined Crawford, we had not grown for 10 years. And again, when I was there, what I realized was it was in a market that was strong. It had an 80-year legacy. It had the expertise, but again, the execution was what was missing. So I've had several experiences of turning around execution. And turning around execution is a cultural change, a change in leadership philosophy, a leadership rhythm. It's being clear-eyed about what the priorities are and staying focused on those priorities continuously and consistently. That is the experience that I had before, and I've done that 2 or 3 times, once as a CEO and before that as more of an operating leader. That is the experience that I'm going to bring here and drive that execution. In terms of measuring, I want to make sure that first, let me start by saying that the investor community is a very important stakeholder for us. So I want to make sure that what I'm giving you is something that is very clear, very definitive and something that I can consistently report on. So that's the reason why I want to hold back. I'm 30 days in. As you know, while Greg is doing a great job as our interim CFO, I'm in the process of appointing a full-time CEO. I want to make sure that appointment is done, and we collectively put our heads together on what are the things that we need to come back to the investor community with that we can share with you consistently and continuously so that you can measure how we're doing against our progress.

Peter Christiansen, Analyst

Good color.

Rohit Verma, CEO

Thank you. I look forward to meeting with you soon.

Operator, Operator

The next question is from Scott Schoenhaus from KeyBanc Capital Markets.

Scott Schoenhaus, Analyst

I guess maybe you can dive deeper into the first quarter guidance, all the moving parts, renewals, pipeline, pricing. Just walk us through what you're seeing at the start of the year here, Rohit, how you think you can manage this throughout the year, how we should expect the cadence both in the near term without providing distinct guidance? And then the longer-term targets of approaching mid-single-digit revenue growth at 30% adjusted EBITDA margins, can you recommit to that target?

Rohit Verma, CEO

Scott, thank you so much for your question. I think what I would say to you is that, as I mentioned before, we did not execute well in 2025, specifically on our renewals, and that's why I said that the financial underperformance of 2025 is expected to spill into 2026. There is a whole bunch of data that I'm analyzing with the team. And right now, that is the reason why I'm projecting to be high single digits lower on the revenue as well as about a 500 to 750 basis points lower on the margin. Because we had a less than stellar renewal season last year, I would say that typically, we want to target our renewals at the mid- to high 90s, we were significantly below that number. We had given you guys last year a revenue under contract, which was about $2.1 billion. Our revenue under contract starting 2026 is about 5% down. And then the level of volatility that we've seen in the project revenue, right now, I'm just not comfortable in giving any more things just because I don't want to put something out there and then have to track back, given I'm 30 days in, there's a lot of work that I'm doing right now with the team. And I can assure you, like I said to Peter, that the investment community is a very important stakeholder for us. So as I get a more full-time CFO in place, as I get a better handle on all of the moving pieces, I will be coming back to something very definitive.

Scott Schoenhaus, Analyst

Great. I guess this is more of a sort of thematic AI industry question here. But are you seeing clients not renewing partly because they're testing their own AI bots and their own products themselves, their own applications internally themselves using these AI platforms?

Rohit Verma, CEO

Scott, I'm so glad you asked that question because that gets asked to me all the time. Look, I think I mentioned that I have met 35 to 40 clients so far. Our client base typically tends to be on the upper end of middle market, right, and then all the way up to the Fortune 100. The level of complexity that you have in those plans, whether it is in terms of the various grandfathered plans that they have, whether it's in terms of the unions that they have, that it's really not possible to do this in-house by coding AI to do this work. If we were talking about a company that has 100 people or 200 people or maybe even 1,000 people, I think the conversation is a little bit different than the scale at which we're talking about. And I would tell you that I would put clients in 3 categories. There are clients that already have the governance structure in place in their organizations for AI, they're very open to putting AI in. In fact, I will tell you that there was a large client that I spoke to just a couple of weeks ago who said, "I don't want to enable any AI because we ourselves are trying to figure out how do we manage AI because of all the security and privacy risk that it opens up. So you have a second category of clients who are still figuring out how do they actively manage what AI is doing and what other controls they have in place, and they are cautious about that. And then you have a third where they have put the infrastructure in place on AI. They want something with it, but they're still waiting to see what's the best way to deploy AI and where it's going to have the biggest impact. In fact, I think I heard one of the large bank CEOs just a couple of days quote that from their perspective, AI is not delivering what they had expected AI to deliver. So look, there's a lot of promise. I'm a computer engineer by education myself. I started AI 30 years ago in college. And obviously, AI today is very different than what it was at that time. But what I can tell you is that we have not seen a meaningful or any kind of disruption right now from an AI perspective, neither in terms of the employee base that we have. We have about over 30 million participants on our system. We have not seen any major change in the number of employees. Now I would also tell you that several of our large employers have had very public restructuring, but also several of our large clients have had new acquisitions. So we have not seen a meaningful change in the number of employees on the platform. Hope that helps.

Operator, Operator

The next question is from Kevin McVeigh from UBS, followed by a question from Peter Heckmann from D.A. Davidson.

Peter Heckmann, Analyst

Rohit, congrats on the new role. I think it's good to have you as the firm and look forward to working with you. I think the termination of the dividend program right after that was the right decision. And as we look into some of the initiatives here that we've just talked about, the additional comp in the fourth quarter of '25 and then the $100 million of incremental investment spend in certain areas, I guess, what portion of both of those do you view as recurring versus onetime? And in terms of the $100 million recurring, would you expect that to be front-end loaded in 2026?

Rohit Verma, CEO

Thank you for the question, Peter. I appreciate it and look forward to meeting you as well. Regarding the $100 million, it's important to clarify that this amount is not an additional investment but rather the capital expenditure we have already planned for this year. While I expect some components of it to be repeated, many of the initiatives we are pursuing will span over a longer period than just one year. As I previously mentioned, this has been a journey of execution for us, and a significant part of our success will depend on making necessary adjustments to our processes and systems to better serve our clients. In terms of compensation, I do anticipate it to be recurring. We are enhancing our sales management capabilities, and I want to ensure that our team members are incentivized to drive execution. Therefore, I expect this expense to be a regular occurrence.

Peter Heckmann, Analyst

Okay. Great. I'm glad I clarified that. I must have misheard rushing through the press release here. Great. Great. Just second question. If I remember correctly, does 2026 represent a bit of a lighter renewal cohort versus the last 2 years?

Rohit Verma, CEO

Yes, you're absolutely right. 2026 is definitely lower compared to 2025, particularly, and it's lower by about 30% - 30% to 40% compared to what it was last year.

Operator, Operator

The next question is from Ross Cole from Needham & Company.

Ross Cole, Analyst

I was wondering if you could talk a little bit more about the internal impact of AI and if you're expecting to see any margin improvement related to that through 2026? Or if that's something that's expected in the out years?

Rohit Verma, CEO

Currently, we have significant work to do regarding technology within the organization, and I believe we are making good progress. However, I don’t anticipate any immediate impact on productivity improvements solely from AI. There are several other initiatives we are pursuing that should enhance productivity. We are applying AI in three key areas. The first is client-facing applications. The second area involves improving the user experience for our clients' participants. The third area relates to how we configure our systems for new clients and annual enrollment processes. This process currently involves a lot of manual labor to gather client requirements and configure them in the system. We are looking into utilizing AI to streamline this configuration. Many of our clients have large employee bases, requiring complex integration, which we believe can be improved with AI this year. Additionally, we handle many files in our processes where clients send employee data, which we then transmit to carriers or financial service providers. We see significant potential for AI to enhance both the efficiency and accuracy of this file handling. Moreover, a well-established use case for generative AI is in call centers, and since we operate a substantial call center, this also presents an opportunity. For AI to be effective, however, we require organized data in a knowledge layer. We have a vast amount of data, but it must be structured effectively to be useful. Therefore, a significant focus for us in 2026 will be developing that data and knowledge layer. This will position us better to leverage AI efficiencies in the future, which I believe will be more prominent in 2027 than in 2026. I hope this provides clarity, Ross, even though it was a lengthy response.

Operator, Operator

The next question is from Kevin McVeigh from UBS.

Kevin McVeigh, Analyst

Can you help us understand, it sounds like some of the renewals that slipped from a retention perspective. What was driving that? Because obviously, that kind of cascades into 2026 overall. But just maybe help us understand what drove some of that slippage? Was it just churn, consolidation? Like what was the main driver of that?

Rohit Verma, CEO

Yes. I believe the main factor stems from what I've mentioned regarding our clients' requests, which include enhancing operational excellence, modernizing our user interface, and ensuring that the relationships we are establishing are strong and consistent. These are the three key aspects that our clients have emphasized, and I attribute our retention challenges to these issues. As I mentioned earlier, these are clear priorities we are currently focusing on.

Kevin McVeigh, Analyst

Got it. And then just from the dividend perspective, it makes sense. I think that was about $86 million. But maybe help us understand like why are we even paying a TRA in 2026? I mean I think it's $130 million, but like it's a massive use of cash. I get to '27, '28, but is there no way to maybe manage that a little bit better just given how much the dynamics of the business have changed?

Rohit Verma, CEO

Kevin, first of all, I would love that if we didn't have to. But I'll let Greg explain the mechanics of why we're doing this in 2026.

Gregory Giometti, Interim CFO

Yes. So the TRA payment in 2026 is for our 2024 tax return. And so what it includes is the gain on the sale of Strada. And so that's why the payment is so elevated. It's really around the divestiture transaction. There's just a 2-year lag in terms of when the payment actually goes out.

Kevin McVeigh, Analyst

Got it. I mean, obviously, you had significant impairment charges, but that doesn't affect that calculation at all.

Gregory Giometti, Interim CFO

No. Because those kind of impact the 2025 tax year, which then will kind of roll into our '27 and '28 payments.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Rohit Verma, CEO

Thank you, Sashi. Thank you all for joining. I appreciate your continued interest in Alight, and I look forward to updating you on our progress in the quarters ahead. Thank you, and God bless.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.